What to do with a correction?

well, it's happened again. The market gained a bunch over the last 10 months since the last swoon, then give it all back on a combination of the same news we've been hearing for the last 2 years about economic uncertainty in Europe, slowing of the growth juggernaut in China,softening prices for basic materials, anemic economic recovery in the USA, etc. All this time, the government has kept the cost of borrowing (and also bond earnings) very low, companies have paid off debt, restructured debt, shed non-core products and divisions, and generally improved their earnings, margins, dividend payments. The DG investor is programmed to applaud corrections as an ideal time to add to positions in strong companies with the preferred profile of rising earnings, rising dividends, low pay-out ratio. That is, if you have cash to deploy. I find myself in the familiar position of being long on positions, short on cash when the correction came. In fact, I spent some cash just before the correction. Silly me, missed the market timing yet again. But then, the DG gurus remind me that no-one is good at timing the market, so incremental investments such as dollar cost averaging, dividend reinvestment plans are considered good things. I'm just not able to keep cash lying around without committing it to something. Since I'm not smart enough or patient enough to only add to positions when prices are down or a given equity is "a better value" than another in my portfolio, I guess I'm doomed to always be short on cash when the big opportunities present themselves. New cash comes into my qualified plan in small increments monthly and a larger bolus yearly. If I could put the cash to work immediately without purchasing equities, i'd be less likely to spend it...Here's the rub; how can I have the cash working, but still available? Since a change of 1-2$ in the value of a stock is merely "noise" in an active market, it takes a drop of perhaps 3-5% to be really noticable and a drop of 10% to be called a correction. Seen in cash-covered put terms, if one sells cash covered puts at strike prices between 3-5% under current value, and is able to earn 5-12% per year on the cash, and then keep the assigned positions when they occur, perhaps that's a means to add positions at favorable values, keep cash earning cash, and avoid holding a significant cash position awaiting a "correction". What about on the "call side"? If the valuations are rising, covered calls always cap the potential gain. That is psychologically difficult; accepting a finite payment now in exchange for losing the chance to experience higher gain in an upward moving market. Perhaps the solution is one of calculating percent gain by options versus holding stocks. If the call premium itself allows earnings of 5-6% per year and you plan appropriately to avoid losing dividend payments, perhaps the combination of call premium plus dividends, in addition to some capital gains between the purchase price and a strike price that would result in the stocks being called away, would soften the pain of losing out on the full value of an upswing in price. For many equities, the cash balance of the account has to be in excess of $3000 to sell even one options contract. One would need to be comfortable keeping 3-5% of the portfolio in "working cash" to accrue the value of having ready cash in the case of a correction in one or more desireable issues. selling options is a very active strategy; takes time and effort to do it, track it, etc. I'm not sure I have both discipline AND enthusiasm for it. I'll be thinking this one over on upcoming holiday time.

high road, low road

There's something counterintuitive going on in my portfolio that deserves a closer look.
My best performing equities tend to be higher-dividend, lower capital-growth rate stocks.
The common wisdom in DG investing says to find companies with steady earnings growth rates, steady dividend growth rates and lower payout ratios. These should perform well over the long run as rising earnings drive both the stock price and dividend payout.

I think what gets lost in that logic is that the growth in your position can be due to capital appreciation, share count growth, dividend growth, or all of the above.

Your high dividend yield company may have modest capital growth, but combine that with a big dividend and reinvestment, your share count ratchets up, your share price grows more leisurely, the dividend rises a bit, along with the modest share price growth. If the dividend is really generous, the share count continues to climb, compounding that big dividend.

Frankly, provided the company's earnings are steady and solid, I'd rather book a larger dividend than hope for sustained growth over time and hope the dividend follows. Companies that aren't growing all that fast can still throw off a lot of cash and, used to re-invest, large dividends lead to rapid accumulation of more stock, compounding the cash return year by year.

If you thrill to see that stock price rise and the value of the position rise with it, choose the faster-growing, lower dividend stock. You aren't quite as motivated by the dividend, perhaps.

If you prefer money in the hand, choose the more modestly growing higher dividend stock, and thrill to the more rapid growth in position as you reinvest those hefty dividends. Look at total growth in the position, or yield on cost, to help figure out the true performance of the individual stock.

that may mean building a spreadsheet...ughh.